The Dow Will Reach 20,000: Altucher

The market every now and then needs a day or two to rest. Maybe even more than a day or two. But over the next 12 to 18 months I expect to see Dow 20,000.

~ James Altucher

I haven’t done a Friday Food for Thought article since the beginning of March. For those who are new here, that’s when I highlight an article I’ve read recently that I think you might find interesting – especially if I heartily agree or disagree with the thesis. Since I wrote about the prospect of the S&P 500 falling 70% on Monday, perhaps it’s only fitting that I give equal time to the bulls today.

Today’s food for thought comes from James Altucher, who thinks we could see the Dow Jones Industrial Average rise to 20,000 over the next 18 months or so. That’s a rise of roughly 65% from where it’s trading as I write this. Yikes. It looks like somebody’s going to be wrong (or right) in a big way. Will it be the bulls or the bears? Let’s take a look at Mr. Altucher’s arguments and you can decide on your vote.

10 Reasons the Dow Will Hit 20,000

If you’re not familiar with James Altucher, he’s well-known for (among other things) predicting the recent market rise off the lows. He was much derided by some for the call, but the tape up until now says he was right. Judging by some of the comments on this article, he’s taking some heat for this call as well. But he’s not just long and hoping for the best, he’s actually got some pretty good reasoning behind his thesis:

The effects of stimulus usually lag by 6 to 18 months. Therefore, QE2 won’t help the economy until the end of 2011.

The market has been supported by the extension of the Bush tax cuts, and Mr. Obama is using the boost in the stock market to help him get re-elected.

The multiplier effect of the stimulus could be up to 10 times the original $600 billion as its positive effects spread throughout the economy.

Non-financial companies are cash rich thanks to their fear of a double dip and they can put that money to work if it never comes.

Companies are already starting to buy back their stocks and when supply goes down, price goes up.

Unemployment numbers may not look very good right now, but temp worker trends are pointing to an improvement.

If S&P profits come in just a little higher than the current consensus of $95 and you put a 20x multiple on that, you get an S&P target of 2000, which likely equates to Dow 20,000.

Many of the large cap stocks are trading at very conservative multiples.

The financial crisis didn’t kill innovation – at least not for Apple.

Major demographic changes will affect the markets over the next 25 years.

That last point is basically a teaser for Mr. Altucher’s next article. He doesn’t tell us what the positive demographic changes are, but I will likely tune in to find out because most of what I read says that demographics will have a negative effect on the markets over the next couple of decades.

Bulls, Bears & Dogs

It’s a dog-eat-dog investment world out there. Bulls and bears are constantly jousting over who will be correct and over what time frame. It looked like James Altucher was wrong last summer. He took some pretty heavy – and not always civil – criticism for his bullish views back then. He regrets the fact that his children had to read about people insulting their Dad personally when they googled their last name.

But from the end of August onward, even his harshest critics would have to admit he was right. Markets are wavering again right now. Mr. Altucher thinks it will pass. Will he be right again?

We have some pretty smart people who think the markets will fall more than 50%. We have others who think it will rise more than 50%. I tend to side with the bears. I have too many concerns over debt, derivatives and the ridiculous size of the financial sector to take a ragingly bullish view. Having said that, I don’t know when all of that will come home to roost, so it’s possible that Mr. Altucher could be right again.

I thought James was wrong the last time he made a bullish call. It turns out I was wrong. That’s why I love to read about views that diverge from my own. Why others find opposing points of view a personal affront – or worse, an invitation to ignore the rules of civil discourse – I have yet to comprehend. While I’m skeptical of Mr. Altucher’s market call, I do agree with him on this:

“It’s usually a bad idea to personally attack someone to get your point across. It’s never really necessary, and it’s lazy and bad writing.”

Thanks Mark. I would definitely not be buying equities if they rose by that much – especially in such a short time frame. If, however, they fell to a compelling valuation, I would certainly dip into some ETFs and probably a few individual names.

I think your 14,000 idea is more realistic, but I wouldn’t be surprised if it fell to 8000 or less either. I always keep the “anything can happen” mantra in the back of my mind. This is a market that’s driving on a road that’s littered with mines. The ride seems very comfortable until we hit one.

Anything can happen so I avoid playing the guessing game. Long term we cannot afford not to have economic growth so it is inevitable. Besides that, there’s no point in market timing even though I believe markets will weaken further this summer.

It sounds like you think the markets can go down in the near term, but that investors with a longer time horizon will do well by sticking to their plan. (I hope I paraphrased the gist of your comment accurately.)

He’s forecasting a 64% increase in the next 18 months? That’s an S&P at 2100+.

I look to the options market for insight on this. It’s willing to bet you 10 to 1 the S&P won’t even close above 1700 in Jan 2013, let alone as high as Altucher claims. (The cost to buy the 165 call and sell the 170 call against the SPY is less than 50 cents.)

I think there’s too much liquidity to see a decrease, but a 15-25% range is far more reasonable.

I don’t follow the options market, so I can’t comment on your thesis there. But your range sounds reasonable. Then again, the markets have been know to become quite unreasonable very quickly. Time will tell.

What better way to generate buzz for one’s hedge fund and website. Nice marketing (others have already made the call to the down side); lousy investment advice. It seems clear to me the guy has an agenda.